Speaking in Brisbane for the release of CEDA’s latest research report, Sustainable budgets: underwriting Australia’s social compact, Mr Ball said, “budgets are all about trade-offs.”

“Despite all the progress made, there’s still significant risks to the budget in both the short and long-term.
“The good news is that we still have time and choices.

“It is perhaps naïve in the current political climate but there is every chance that if we look squarely to the long-term challenges and seek to address those, the short-term may take care of itself.” Discussing tax reform, Mr Ball said, “we’ve had plenty of false starts on this over the last decade and you’d have to say this is catching up with us, both from a fiscal and economic perspective.”

“Personal income tax payers have been bearing a significant burden from budget repair.

“Even with recent personal income tax cuts every quintile will see increasing average tax rates over the next decade.

“And to underline the point that bracket creep impacts everyone, consider the fact that a full-time minimum wage earner is now starting to face a marginal tax rate of 32.5 per cent.

“Our other revenue crutch has been company tax, which has a lot to do with the recent budget improvement.
“But the evidence suggests that it comes at a cost to our economy.

“The latest OECD evidence suggests that Australia’s effective average tax rates are uncompetitive.

“And I stress the word effective here – they take into account a range of incentives in the tax system aside from the statutory rate including accelerated depreciation.

“Our corporate tax base is also relatively volatile and can swing down just as quickly as it can swing up, making budget forecasters’ lives precarious.

“We cannot forget that just six companies account for a quarter of our corporate tax base – the four banks and two large miners.

“Therefore, we do support efforts over time to try and limit the negative economic impacts of these tax bases.

“This means addressing bracket creep with a focus on personal income tax relief for those facing the most rapidly increasing average tax rates in the second- and third-income quintiles.

“On the corporate tax side, in absence of consensus to reduce the statutory rate, there is a need for stopgap measures like allowances for new investment.
 

“We also looked around at the various tax proposals that have been part of recent economic debates, previous tax reviews and previous CEDA reports.

“Our intention here was to identify sensible proposals that could be used to address a revenue shortfall or fund tax relief to rebalance the tax system.

“In the report we seek to outline a balanced and succinct account of different proposals – the case for change, relevant historical context and the risks.

“Some of the proposals we have identified are contentious and I don’t for a second suggest that any of these relatively ‘modest’ proposals are easy.

“Tax changes never are – not even tax cuts.

“We have stressed that there is time to progressively implement careful changes with well-crafted transitions to limit any unintended consequences or undue hardship.

“The removal of dividend imputation refundability is perhaps the most contentious at the present time.

“Refundability was introduced in 2001 – a relative boom time for the budget.

“And the revenue foregone from this move was only supercharged by the decision to make super earnings for those over 60 tax free in 2006.

“We fully accept in the report that refundability is consistent with an imputation system.

“That is, where company tax forms a pre-payment of shareholder’s tax, with the final tax obligation being paid at their marginal tax rate, even if that rate is zero and results in a refund cheque from the ATO.

“But the revenue sustainability equation for such a pure form of imputation is challenging especially at a time when a growing number of older Australians have zero taxable incomes.

“The revenue foregone has grown from around $550 million at the time of introduction to around $5 billion today.

“The equation is still growing. With an ageing population we will have seven million people 65 and over by 2050.

“Both the Financial System Inquiry and the Re:think Tax White Paper processes highlighted the increasing revenue cost.

“We are sensitive to the fact that people have planned their retirements with this policy in place, they may have uncertainty about their longevity and some people with more modest incomes could be impacted.

“This will require careful design and transition.”

Capital gains tax and full volumetric taxation for alcohol were also highlighted as being a priority in CEDA’s budget report.

“If we’re going to build consensus for budget repair, let’s not lose sight of why balanced budgets matter,” he said.

“Budget sustainability matters for funding Australia’s social compact.”
  
“I think there are some things that government can do to get a bigger bang per buck, and this is why I really like the CEDA report because it just picks up a whole bunch of really sensible things that should be done and some really nice governance arrangements about how to think about doing them,” she said.

“Today what is government expected to deliver? Jobs and growth, wage growth for people, but they’re also expected to deliver a whole bunch of in-kind services, and then social insurance.

“When we think about a social compact it’s actually a combination of those sort of broad categories.

“One of the challenges is the rising tide of economic growth has slowed down.

“Australian income and our terms of trade have been very strongly linked.

“Our terms of trade are still well above our long term average, so if it drops back down, if China really does cool down and we don’t see growth in India to pick up the demand for the minerals resources, our terms of trade will drop and that’s going to make it even harder for Australia to actually maintain those budget balances.”

Other challenges to the tax base Dr Gordon discussed included ageing, inequality and underemployment.

CEDA’s report, Sustainable budgets: underwriting Australia’s social compact was released on 8 March 2019. Learn more – download the full report or the snapshot.

Dr Jenny Gordon was also a contributor to the 2019 Economic and Political Overview which was released in February. To read her contribution on Australia’s policy settings, click here.